Lebanese economy looks for traction

Lebanese officials hope a value-added tax starting next month will stabilize a spiraling economy.

When a series of crippling power cuts left most of Lebanon in darkness recently, Abu Hamdan was one of the few people who smiled.

Dozens of households in his Beirut neighborhood are hooked up to a huge generator, blackened with soot and streaked with rust, which sits outside Mr. Hamdan's tiny one-room home. His clients pay a $10 monthly fee, but when the national power is off, the rate climbs to $40 a month.

Ask him how many clients he has and Hamdan smiles and raises his eyebrows - a Lebanese expression that means "no comment."

The Lebanese government blamed the cuts on fuel shortages and stormy seas that prevented three oil tankers from docking and unloading. The board of Electricité du Liban, the state-run power utility, was replaced and told to come up with a recovery plan.

But the Lebanese media said that Syria had stopped supplying electricity to its tiny neighbor because of an unpaid bill of $120 million.

For many Lebanese, the power cuts were just another painful reminder of the economic turmoil besetting the country. Some economists are warning of a financial collapse if no solution is found to resolve the huge public debt.

Lebanon is saddled with a massive public debt nudging $28 billion, a staggering sum for a country half the size of Massachusetts and with a population of around 4 million. The debt is 165 percent of GDP, the fourth highest debt/GDP ratio in the world after Nicaragua, Zambia, and Malawi, according to the Economist Intelligence Unit. "The overall financial situation is very critical," says Kamal Hamdan, chief economist with Beirut's Consultative and Research Institute.

The economic crisis of today is a far cry from the heady optimism of the early 1990s.

After a 16-year civil war, the government launched an ambitious multibillion dollar reconstruction scheme to rebuild the country, which leaned heavily on international lenders.

The government was gambling on the Middle East peace process, launched in 1991, being concluded by 1996, allowing a peaceful Lebanon to prosper and repay its ballooning debt. Fueled by optimism and huge capital inflows from Lebanese expatriates, growth rocketed, reaching 8 percent in 1995.

But the anticipated peace never arrived, and by 1999 the country was gripped by a worsening economic recession. The growth rates of the mid-1990s steadily fell, hitting zero percent in 2000, while the debt increased by $18 billion between 1997 and the beginning of this year.

Yet despite the gloomy outlook, Lebanon's Prime Minister Rafik Hariri remains determinedly optimistic, saying that Lebanon's future "has never been so promising."

Mr. Hariri's government is in the process of launching a number of cash-generating enterprises, including the introduction of a 10 percent value-added-tax (VAT) at the beginning of February and privatizing some key utilities.

Despite the cost of maintaining the lira at its present level of about 1,500 to the US dollar, Mr. Hariri says that devaluing the national currency "is not a solution."

"There is no benefit for the country in devaluing the lira," he says. "The solution is to reduce our costs and increase our revenues."

But some economists believe the country can ill afford the lira's drain on central bank reserves.

"There's nothing wrong with a controlled devaluation," says Mr. Hamdan. "The political class is still ignoring the very big cost of this stabilization policy."

Lebanon signed a trade agreement early this month with the European Union in which customs tariffs on imports from the EU will be phased out in exchange for allowing Lebanese goods access to European markets.

Officials hope the imposition of the VAT next month will generate $500 million. And the proceeds of privatization are expected to replace the revenues lost through the gradual abolition of customs duties - traditionally the Lebanese treasury's biggest earner.

Yet obstacles persist, such as Lebanon's notoriously cumbersome bureaucracy. Attempts to eliminate red tape often conflict with the interests of the country's powerful ruling elite, creating political crises.

Waste and corruption also hamper government efforts to raise revenues.

"The government is unable to stem the waste of $350 million in unpaid electricity bills and $150 million in [illegal] telephone operators," says economist Marwan Iskandar. "As a Lebanese citizen, why should I pay a [VAT] tax, only to have it squandered by the government?"

A recent surge in real estate purchases, mainly by wealthy Gulf Arabs, and growing hotel occupancy rates are a possible indication of better times ahead for Lebanon.